.jpg){kind=avatar}
SOCIAL MEDIA GONE BADLY WRONG
Like many of you, I have been a subscriber to the Wall Street Journal (WSJ) for as long as I can remember. It is the single most excellent source of financial information and insights available. I sometimes disagree with their analysis, but I always respect their position.
However, I couldn't disagree more with their article this past weekend, The New Math of Renting vs. Buying. Below are a few excerpts from the paper and why I believe the analysis is incorrect.
The Cost of Renting is lower than the Cost of Owning
The article discusses that homeownership is more expensive than renting in many large metropolitan areas.
"The monthly cost of renting was lower than buying in 20 large metropolitan areas at the end of last year, the most recent period for which data are available, according to figures provided exclusively to The Wall Street Journal by Deutsche Bank. That is up from 15 large metropolitan areas a year earlier."
The challenge is that more recent data from two reliable sources has shown this is different. Among the 35 largest metro areas analyzed by Zillow in the first quarter, every metro showed it would be cheaper to buy than rent if you plan to live in the home for at least 4.2 years.
According to a study by Trulia:
"Homeownership remains cheaper than renting nationally and in all 100 largest metro areas. Rising mortgage rates and home prices have narrowed the gap over the past year, though rates have recently dropped, and price gains are slowing. At a 30-year fixed rate of 4.5%, buying is 38% cheaper than renting nationally." (emphasis added)
We have all heard of the rents rising here in Denver, where four years ago, you may have rented a one-bedroom at $700, you see them well over $1000.
Ready to find your dream home in Colorado?
Let us help you. Call or Text Kenna Real Estate Group at 303-955-4220 to get personalized assistance from our expert real estate agents. Find out what your home is worth in today's market.
Renters Don’t Have All the Expenses of Homeowners
The article goes on to explain that as a renter, you have many fewer expenses than you would have as a homeowner:
"Renters, for example, don't pay property taxes, homeowner's insurance, and, in most cases, maintenance costs. Experts say these expenses can cost homeowners about 3% of their home's price annually."
While those costs can be folded into monthly rent, apartment renters often pay a smaller share as landlords spread the costs among many tenants, says Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University. If a window breaks or the toilet plugs up, your landlord—not you—pays for the repairs."
Don't kid yourself – the landlord does not pay the taxes nor pay for repairs. The tenant does. It is incorporated in the rent. It is true that if it is an apartment building, all tenants share the property taxes. However, realize that the property taxes for an apartment building with "many tenants" will be far greater than a single-family residence. You also pay for your property's utilities by paying a percent of the bill based on the number of occupants and square footage.
"Households must consume housing whether they own or rent. Not even accounting for the more favorable tax treatment of owning, homeowners pay debt service to pay down their principal, while households that rent pay down the principal of a landlord plus a rate of return. That's yet another reason owning often does—as Americans intuit—make more financial sense than renting." (emphasis is mine)
Investing the Difference in Payments Will Net a Renter More Money
The WSJ article claims that if a renter invests the difference between their rent payment and a potential mortgage payment had they purchased, they would be better off financially in the long run.
"Renters don't end up with a valuable asset, as buyers do when they pay off a mortgage. But renters might be able to make more money by investing the monthly savings and the cash they would otherwise use for a down payment, he says."
They go on to explain their reasoning as follows:
"The value of the average single-family home increased by 3.6% a year in the three decades through 2013, compounded annually, according to mortgage giant Freddie Mac. By contrast, the compound annual return on the S&P 500 over that period was 11.1%, according to Chicago-based investment-research firm Morningstar."
As to the idea that the return on investment would be greater by investing in the stock market rather than purchasing a home, the article in the WSJ forgot that housing is a leveraged investment. Belsky, in his paper, explains:
"Few households are interested in borrowing money to buy stocks and bonds, and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation of the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five, so every percentage point rise in the home's value is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is ten or more."
Ready to find your dream home in Colorado?
Let us help you. Call or Text Kenna Real Estate Group at 303-955-4220 to get personalized assistance from our expert real estate agents. Find out what your home is worth in today's market.
That 3.6% average annual appreciation is an 18% return on cash to a home buyer putting down 20%.
They also assume the renter will save any difference in housing expenses. However, that does not happen in reality. In their ongoing research for their paper, Beer and Cookies Impact on Homeowners' Wealth Accumulation, Eli Beracha and Ken H. Johnson reveal that homeownership creates a 'forced savings' plan:
“Homeownership creates extra wealth mainly through its ability to force owners to save rather than through property appreciation. Thus, homeownership is a self-imposed savings plan, leading to more significant wealth accumulation over time than comparable renters. In short, buying a home makes Americans save.”
And Belsky from Harvard agrees:
"Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people's tendency to defer savings to another day."
To further make this point, we can look at a study by the Federal Reserve, which showed that a homeowner's net worth ($174,500) is 30 times greater than that of the renter ($5,100).
Looking at the financial advantages of homeownership from every angle still reveals that it is a much better investment than renting. Do you find renting cheaper than buying?